The 2022 stock market downturn has created an opportunity to take long positions in various stocks at bargain prices. After viewing the best cheap micro cap and middle class Stocks out there, let’s turn our attention to cheap blue chip stocks.
Typically, blue chips, or stocks in time-honored, well-established companies, don’t come cheap. That’s not to say they’re typically overvalued, or that investing in blue chips will result in underperforming returns unless you buy them at a discount.
As Warren Buffett’s famous quote says“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
But what if you can buy a “wonderful company” at a more than fair price? There may be an opportunity for even more substantial long-term returns. First, market conditions are normalizing, resulting in discounted blue chips returning at fair prices. Then steady profits from price increases and dividends over a longer period of time.
So what are the best cheap blue chip stocks out there today? Consider these seven, each of which is a quality company currently trading at a low valuation.
|BTI||British American Tobacco PLC||$36.81|
|WELL, Google||alphabet||$99.57, $98.68|
|JPM||JPMorgan Chase & Co.||$105.98|
British American Tobacco PLC (BTI)
Blue chip tobacco stocks like British American Tobacco PLC (NYSE:BTI) are trading at low valuations even in a bull market. This is of course due to the fact that the industry’s cash cow product, cigarettes, is experiencing a secular decline. Whether “Big Tobacco” can still thrive in a post-cigarette future is uncertain.
But recently, BTI stock has fallen to a meager price. Today, you can buy this global tobacco giant (whose brands include Camel and Newport) for just 8.1x expected earnings. BTI is not only cheaper than the overall market, but also cheaper than peer Altria Group (NYSE:MON), which is trading at around 8.6 times forward earnings.
Not only that, unlike Altria, that billion lost on your Jul Labs Investment has British American Tobacco demonstrated success in diversifying its product mix beyond cigarettes. That could put it well-positioned to maintain (and grow) its high-yielding 7.99% dividend.
Alphabet (GOOG, GOOGL)
It might be a relatively young company and might not pay a dividend, but it’s fair to say Google parent alphabet (NASDAQ:WELLNASDAQ:Google) is a blue chip stock. This is due to several factors, including a deep economic moat, high operating margins, and a strong balance sheet.
You might agree that GOOG stock is blue chip, but disagree that it’s one of the cheap blue chip stocks. I agree with you that this stock is not “undervalued” on an absolute basis as it is trading at 18.8 times earnings. in line with major indices how S&P500,
However, Alphabet’s current earnings multiple may overestimate how long its core digital advertising business remains in a slump and underestimate the company’s potential to reaccelerate earnings growth. Stocks have strong potential for recovery once the digital advertising and alphabet markets recover other growth catalysts start playing.
While Alphabet is a rising tech blue chip, IBM (NYSE:IBM) is a blue chip tech “dinosaur”. At least that is still the market perception of this more than hundred-year-old technology company.
With earnings up 19.3 times and an expected dividend yield of 5.44%, detractors of this stock will warn it’s a value trap and potentially a yield trap. But despite “Big Blue’s” poor performance over the past decade (down nearly 38.5%), the next decade could be a lot better for IBM stock investors.
Why? Expect the ongoing transformation into a primarily hybrid cloud computing company. Through complementary acquisitions, IBM continues to expand its presence in the hybrid cloud space. That could help it become a faster-growing company and lead to significantly higher prices for IBM stock in the years to come.
JPMorgan Chase & Co (JPM)
As Investor Places Joel Baglole recently discussed, JPMorgan Chase & Co. (NYSE:JPM) was hammered by market fears of a recession. Those worries have outweighed the tailwinds for this banking giant, namely the sharp rise in interest rates, which points to higher profitability.
However, it can be argued that these recession worries are already fully factored into JPM stock’s valuation. Shares in the Money Center Bank are currently trading at 9.7 times estimated 2022 earnings. However, this rating doesn’t look like a huge discount at first glance, towards the lower end of their rating over the past five years.
If JPMorgan Chase is able to weather today’s economic storms and capitalize on the current environment of rising interest rates, future operating results could be stronger than expected. A bank stock analyst (Citi’s Keith Horowitz) expects. A series of gains could allow JPM to move higher on a re-rating.
If you’re looking for cheap blue chip stocks on a screener, you’ll probably find them first Pfizer (NYSE:PFE). The pharma giant is trading at a super-low valuation (just 8.28 times earnings), although there is a caveat.
Earnings in 2021 and 2022 can be said to have been “boosted” by the launch of the Covid-19 vaccine, which the company helped develop BioNTech (NASDAQ:BNTX). With the wave of vaccinations long gone, Pfizer’s revenues are likely to fall.
However, with an expected decline in earnings per share (or EPS). $6.49 to $5.09 Next year, PFE stock is still cheap. Based on estimates for the next year, Pfizer is trading at 8.5 times earnings. There could be room for stocks up towards a valuation comparable to other pharma stocks. Pfizer’s peers trade at a valuation closer to 10 times earnings.
Verizon Communications (VZ)
Rising interest rates have pressured telecom stocks, which investors are buying mostly for their high dividends. Verizon Communications (NYSE:vz) may not be as popular as AT&T (NYSE:T) among dividend investors, but that factor has pushed this “Baby Bell” down nearly 28% year-to-date.
If interest rates continue to rise, VZ stock is likely to fall. However, if your bullish rates don’t get much higher from here, and you’re looking to snag dividend stocks at attractive valuations, now might be the time to buy.
Verizon’s expected dividend yield is currently around 7.08%. That’s only slightly lower than AT&T’s current forward yield of around 7.43%. Not only that, as I’ve argued before, VZ beats T-Aktie in areas like dividend coverage and dividend growth. VZ is trading at just 7.4x earnings, despite being higher than AT&T’s current multiple of 5.6x, and is cheap even among cheap blue-chip stocks.
Exxon Mobile (XOM)
Until early this month Exxon Mobile (NYSE:XOM), like other oil stocks, retreated. This came in tandem with the fall in crude oil prices on concerns that a recession-related fall in demand would outweigh the impact on supply from the Russian invasion of Ukraine and subsequent sanctions.
However, in October, oil (and XOM stocks) started to recover. Hopes of a “normalization” in oil prices were dashed, as were OPEC and its allies Production cuts approved. This could counteract any impact of a recession on demand, which could keep prices high.
This, in turn, allows ExxonMobil to continue at its current level of profitability. XOM is currently trading at a discounted valuation of 11 times earnings and could rise on multiple extensions in anticipation of a drop in oil prices. That Company’s capital allocation plan can also help moving the needle for a longer period of time.
At the time of publication Thomas Niel held a long position in MO. He had (neither directly nor indirectly) positions in other securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.